Who Will Satisfy China’s Thirst for Industrial Robots?

China’s move toward automation is still largely reliant on imports from abroad.

By Zi Yang for The Diplomat

May 19, 2017

China is the buyer of 27 percent of the world’s industrial robots. As the country presses full steam ahead with manufacturing automation, the demand for industrial robots continues to surge. While imports constitute the overwhelming majority, the state is also promoting domestic robot manufacturers. The national program of “Made in China 2025” seeks to make China a robotics powerhouse in eight years. In the year 2015 alone, the government of Guangdong Province invested $150 billion to encourage automation and foster robotics innovation.

Ostensibly, it seems that a Chinese robot takeover is imminent, prompting one analyst to warn that China is planning “world robot domination.” But what is really going on inside China’s industrial robot industry? What are the business prospects for the world’s robotics firms? I contend China still has a long way to go in matching the technological sophistication and scale of leading global robotics companies. Nonetheless, China is an enormous market where there are billions of profits in waiting.

Manufacturing, the staple of China’s economy, is undergoing a rapid transformation. With an aging population and rising labor costs, the old model based on inexpensive migrant workers is no longer sustainable. Automation is the future. While low-end manufacturing firms are moving to Southeast Asia to cut costs, automotive and electronics manufacturing, two industries with the highest usage of industrial robots at 42 and 22 percent respectively, continue to grow. In 2015, 24.6 million automobiles were sold in China, a 4.7 percent increase year-on-year. And in the next five years, the automotive industry is projected to expand 6 to 7 percent annually. In addition, 70 percent of the world’s computers, communications equipment, and consumer electronics are made in China.

Although the world’s biggest buyer of industrial robots, China’s robot density rate is comparatively low at 49 robots per 10,000 workers, below the global average of 66. Worker replacement programs have been put in place nationwide. Between 2014 and 2016, the city of Dongguan replaced 87,000 workers with robots. Likewise, Zhejiang Province, China’s vanguard in the robot revolution, replaced two million workers with robots between 2013 and 2015. One company reported savings of 10 million RMB ($1.4 million) in labor costs, or 7 percent of the firm’s annual net profit. To speed up automation, China is relying on both imported and domestic robots.

The International Federation of Robotics notes by 2019, 40 percent of the world’s industrial robots will go to China. Foreign imports supply 80 to 90 percent of the Chinese market demand. With strong demand comes high price, and according to the president of China Robot Industry Alliance, it is normal for foreign firms to charge a higher price when selling a unit to China compared to other developed countries where demand is less. The price range to purchase and set up an imported industrial robot with application-specific peripherals is between 450,000 to over one million RMB ($65,000 to $145,000).

Under these circumstances, the Chinese government is pushing hard for a domestic industry that can manufacture robots for the same quality but at a cheaper price. Yet this is much harder than it seems. Although the government has made heavy investments, half of China’s 800 robotics firms do not produce new products. Seventy to 80 percent are agents for other companies. Eighty-eight percent focus on system integration, the lowest-end in the robotics industry. Chinese technology lags far behind foreign competitors. As of today, controllers, decelerators, and servomotors — the core components of industrial robots — rely totally on imports. Nantong Zhenkang Machinery Limited Company, one of China’s best robotics corporations only sold 12,000 decelerators in 2016, a fraction of Japan’s Nabtesco’s annual decelerator sales of 250,000 to 300,000. In addition, Chinese-made core components are generally larger in size and low in output power when compared to ones made in Japan. Less than 10 percent of domestically manufactured industrial robots are of the six-axis type that can perform complex tasks like assembly, disassembly, and welding. Sixty percent are three or four-axis machines used mainly for lifting and moving weights.

What Is Keeping Chinese Firms Behind?

Lack of talent, issues with intellectual property rights protection, and faulty government subsidy programs are three key hurdles preventing the advancement of Chinese robotics firms.

China has a very limited pool of robotics professionals. The Chinese educational infrastructure is largely to blame. Robotics engineering courses are only offered at a few of the country’s universities. Presently, very few in China can independently design and program industrial robots. Control systems and programming software mostly depend on importation. Not to mention there is also a technician shortage.

Intellectual property theft is a regular occurrence in China, due to the weak enforcement of intellectual property rights laws. This means talented engineers and programmers would rather innovate in countries where the rule of law prevails. Therefore it is not surprising that China holds less than one percent of industrial robot patents.

Lastly, government subsidy schemes, which focus on manufacturing, sales, and quantitative growth instead of research and development, are not helpful for the domestic robotics industry’s long-term success. Rather than concentrating its resources on a few flagship projects, the central government delegated the task of robotics subsidies to local authorities, which resulted in the diffusion of talent, technology, and investment. Currently there are more than 800 robotics firms scattered among 50 science and technology parks. Most do not have the scale and talent needed to innovate. Many Chinese robotics firms are over-reliant on government funding, and 80 to 90 percent will probably die out whenever the government decides to sever subsidies. Corruption and fraud are common. While some firms received “research funding” based on amiable relations with local officials, others simply opened up shop, applied and obtained grants, then closed their doors to repeat the same scam in the next city.

Conclusion

While automation brings its own set of problems, such as unemployed workers and robot security issues, the progress made so far is unlikely to be reversed, as it suits China’s developmental trajectory of high-end, technologically sophisticated manufacturing. However, existing obstacles mean China’s domestic robotics industry will not catch up with foreign competitors any time soon. Reaching some kind of parity in ten years is the most optimistic assessment. Chinese industrial robots have no real advantage over imports besides price, but a higher failure rate means Chinese consumers have much more confidence in foreign-made products.

Although Chinese companies are purchasing technologies abroad, they ultimately must innovate to remain competitive. As mentioned previously, if the government decides to terminate subsidies, we will likely witness a mass collapse of most Chinese robotics firms in the next few years, with only the cream of the crop remaining. Japan, the global leader of robotics, is already making headway into the Chinese market with joint ventures and local manufacturing bases, which serves as a model for other leading industrial robot firms. (The latest development came in April 2017, when Yaskawa Electric beat competitor FANUC to a joined venture worth $7.2 million with Shenzhen Everwin Precision Technology to produce small-scale six-axis robots.)

Projected to absorb 40 percent of the world’s industrial robots by 2019, China has deep market potential. According to one estimate, China’s industrial robot market demand value will be around 500 billion RMB in 2020, or $72.5 billion. With favorable tax and tariff policies, now is a good time for foreign firms to expand production capacity to quench the increasing thirst of the Chinese market for industrial robots.

Zi Yang is a researcher and consultant on China affairs. He covers Chinese politics, security, and emerging markets. Zi holds a M.A. from Georgetown University and a B.A. from George Mason University. Follow him on Twitter @MrZiYang.